In the context of expansionary and contractionary fiscal policy, how does the government typically change fiscal policy to influence aggregate demand?

• A. By changing the required reserve ratio and the discount rate through the central bank
• B. By setting price ceilings and floors to directly control the overall price level
• C. By changing government spending and/or taxation to affect total spending in the economy
• D. By changing import quotas and tariffs as the primary tool to manage domestic unemployment

Answer: (C)

Verified step by step guidance

1. Step 1: Understand that fiscal policy refers to the government's use of its spending and taxation powers to influence the economy, particularly aggregate demand.
2. Step 2: Recognize that expansionary fiscal policy involves increasing aggregate demand, typically by increasing government spending or decreasing taxes, which puts more money into consumers' hands.
3. Step 3: Understand that contractionary fiscal policy aims to reduce aggregate demand by decreasing government spending or increasing taxes, which takes money out of the economy.
4. Step 4: Note that changing the required reserve ratio and discount rate are tools of monetary policy, controlled by the central bank, not fiscal policy.
5. Step 5: Realize that price ceilings, floors, import quotas, and tariffs are not primary tools of fiscal policy to influence aggregate demand; instead, fiscal policy mainly works through government spending and taxation decisions.